Commercial Real Estate Fundamentals Sound – Investment Slowing

WASHINGTON – Dec. 21, 2007 – The fundamentals in commercial real estate remain healthy with only slight increases in vacancy rates expected for the office and industrial sectors during 2008, although credit restrictions have recently slowed overall investment activity, according to the latest Commercial Real Estate Outlook of the National Association of Realtors® (NAR).

The report said commercial fundamentals are essentially sound. “Although vacancy rates remain relatively low for all sectors, they are expected to rise slightly in the office and industrial markets during the coming year because much of the space being absorbed is in high-quality buildings or is built-to-suit,” says NAR Chief Economist Lawrence Yun. “As a result, there is a fair amount of older space on the market, particularly in the industrial sector where obsolescence is a factor, although industrial rents are showing healthy gains. Vacancy rates in the retail and multifamily sectors are projected to tighten in 2008 with rents rising in all sectors.”

Yun said the credit crunch has been impacting the market over the last few months, but 2007 is already a record for commercial real estate investment. “Tighter credit conditions will limit individual commercial real estate investment deals moving forward,” he says. “Because capitalization rates are already very low, it is likely that commercial property prices will ease. The era of rapid commercial property price increases has ended.”

A record $325.0 billion was invested in commercial real estate in the first 10 months of 2007, up from $306.8 billion for all of 2006; that total does not include transactions valued at less than $5 million or investments in the hospitality sector, based on analysis of data from Real Capital Analytics.

Patricia Nooney of Saint Louis, chair of the Realtors® Commercial Alliance, says commercial real estate investment is expected to stay historically strong. “Even with the credit crunch there’s been no significant impact on institutional investors, and it’s unrealistic to set new records every year in a cyclical business,” she says. “There’s been a shift in investment activity to foreign buyers, who are taking advantage of the dollar’s decline relative to other currencies. With many areas showing favorable fundamentals, commercial property in the U.S. has become very attractive to foreign investors.”

The NAR forecast in four major commercial sectors analyzes quarterly data for various tracked metro areas. The sectors are the office, industrial, retail and multifamily markets. Torto Wheaton Research and Real Capital Analytics provided historic metro data.

Office market

With jobs still being created, the demand for office space remains positive and is helping to absorb the more than 30 million square feet of new space becoming available in the current quarter. Investment grade office properties with solid income streams will be the most in demand by institutional investors, equity funds and foreign investors.

Since not all of the vacated space is being back-filled or leased, office vacancies are forecast to rise to 13.2 percent by the fourth quarter of 2008 from an estimated 12.9 percent in the current quarter; it was 12.6 percent at the end of 2006. Annual rent growth in the office sector should be 8.0 percent this year and 2.0 percent in 2008, after rising 5.2 percent in 2006.

Projections for the fourth quarter show areas with the lowest office vacancies include New York City; Honolulu; Tucson, Ariz.; Long Island, N.Y.; Los Angeles; and Riverside, Calif., all with vacancy rates of 10.0 percent or less.

Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 55.4 million square feet in 2007 and 43.0 million next year, but below the 81.2 million in 2006.

Office building transaction volume in the first 10 months of this year totaled a record $173.5 billion, compared with $133.5 billion for all of 2006. So far this year foreign investors purchased $12.5 billion worth of office properties, with buyers from the Middle East and Germany accounting for half of that volume.

Industrial market

The weaker dollar is fueling an increase in exports, but leasing activity has declined in port distribution hubs, and vacancy rates in those markets are edging up; some users are building or renting in secondary markets.

With abundant land and relatively low concerns regarding site remediation, secondary and tertiary markets are experiencing greater interest. So far this year, almost 16 percent of industrial investment has taken place outside of the 58 primary markets tracked.

Vacancy rates in the industrial sector are projected to average 9.4 percent in the fourth quarter and 9.5 percent by the end of 2008; vacancies averaged 9.4 percent in the fourth quarter of 2006. Annual rent growth will more than double to 3.3 percent by the end of 2007 and is seen at 1.3 percent a year from now, compared with a 1.4 percent annual gain at the end of 2006.

The areas with the lowest industrial vacancies include Los Angeles; San Francisco; Tucson; Orange County, Calif.; Portland, Ore.; and Las Vegas, all with vacancy rates of 6.1 percent or less.

Net absorption of industrial space in 58 markets tracked is expected to total 127.4 million square feet in 2007 and 144.0 million next year, down from 205.4 million in 2006.

Industrial transaction volume in the first 10 months of 2007 was $35.8 billion, compared with $38.9 billion for all of 2006.

Retail market

Even with a decline in consumer confidence, retail vacancy rates remain fairly stable. Declining production of new space will help improve fundamentals in this sector during 2008.

Vacancy rates in the retail sector will probably rise to 8.9 percent in the current quarter from 8.0 percent at the end of last year, and then ease to 8.6 percent by the fourth quarter of 2008. Average retail rent should grow by 2.2 percent this year and 1.9 percent in 2008, after rising 3.9 percent in 2006.

Retail markets with the lowest vacancies include San Francisco; Orange County, Calif.; San Jose, Calif.; Ventura County, Calif.; Washington, D.C.; and San Diego, all with vacancy rates of 5.5 percent or less.

Net absorption of retail space in 53 tracked markets is forecast at 18.6 million square feet for 2007 and 24.7 million next year, up from 10.5 million in 2006.

Retail transaction volume in the first 10 months of this year totaled $52.9 billion, exceeding the $46.9 billion for all of 2006. The Southeast is the most sought-out region this year.

Multifamily market

The apartment rental market – multifamily housing – is experiencing increased demand from the slowdown in home sales. With a rising population and a growing number of households, vacancies are tightening and rents are rising.

Multifamily vacancy rates are projected to average 5.4 percent in the current quarter, down from 5.9 percent in the fourth quarter of last year, and then continue to decline to 5.1 percent by the end of 2008. Average rent is likely to rise 3.1 percent for 2007 and 3.8 percent next year, following a 4.1 percent increase in 2006.

Multifamily net absorption is expected to total 234,400 units in 59 tracked metro areas in 2007, below the 229,500 last year, but should rise to 245,800 in 2008.

The areas with the lowest apartment vacancies include Northern New Jersey, Salt Lake City, San Jose, San Diego, Nashville and Philadelphia, all with vacancy rates of 3.3 percent or less.

Multifamily transactions in the first 10 months of this year totaled $62.3 billion, compared with $87.4 billion for all of 2006. The sale of buildings originally constructed as condos are being sold to multifamily investors in markets like Washington, D.C., and South Florida. Many markets have seen condo “for sale” signs change to “apartment for lease” signs almost overnight. Some condominium complexes are being converted into office buildings, and others are becoming mixed-use projects.

The NAR Research Division for the Realtors Commercial Alliance publishes the Commercial Real Estate Outlook. Organizations in the RCA include the CCIM Institute, the Institute of Real Estate Management, the Realtors Land Institute, the Society of Industrial and Office Realtors, and the Counselors of Real Estate. The RCA also provides commercial products and services.

© 2007 FLORIDA ASSOCIATION OF REALTORS®

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Tax Tips For Real Estate Developers And Investors

CHICAGO – Dec. 6, 2007 – As 2007 comes to an end and planning for 2008 begins, real estate developers and investors should consider some tax tips that could save money for companies in the long run:

1. Properly account for lease income. You may be accounting for your lease income for tax purposes based on the cash received or on the terms of the lease agreement. However, a Code section specifically addressing leases may require the income to be accounted for differently.

2. Determine if you are a dealer or an investor. Do you know your status as either a dealer or an investor for tax purposes? Proper planning up front will ensure the desired treatment upon disposition of the property.

3. Allocate land cost to your benefit. To defer income upon the sale of parcels from a tract of land purchased, proper allocation of the cost among the various parcels must be done. The IRS requires that the cost be “equitably apportioned.” But how? There are several methods available that should be considered when allocating cost.

4. Color your building green. Including solar and other alternative energy property in a new building can generate tax credits. A new owner can deduct up to $1.80 per square foot of the cost of an energy efficient commercial building instead of depreciating it over 39 years.

5. Take full advantage of depreciation. Has your company recently undertaken new construction projects, expansions or renovations? Substantial long-term savings could result from a cost segregation study, which categorizes your assets into the appropriate and most tax-advantaged depreciable lives.

“To learn how these tax tips may apply to your real estate business, please contact your tax advisor,” said Jerry Williford, tax senior manager in Grant Thornton LLP’s real estate industry practice.

© 2007 FLORIDA ASSOCIATION OF REALTORS®

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NAR Survey: Commercial Practitioners Make Big Money

AS VEGAS – Nov. 14, 2007 – A survey of National Association of Realtors® (NAR) commercial members showed that more than 51 percent earned $100,000 or more in 2006 – 18 percent earned $250,000 or more; 33 percent earned between $100,000 and $250,000; and 24 percent earned between $50,000 and $100,000.

Results were announced during this week’s National Association of Realtors Conference & Expo being held in Las Vegas. Members of the Realtors Commercial Alliance were surveyed in the summer of 2007.

Land sales was the top commercial specialty among respondents. The top six specialties cited by respondents as their primary specialty were:

1. Land sales (19 percent)
2. Office leasing (11 percent)
3. Multifamily building sales (11 percent)
4. Retail building sales (10 percent).
5. Office building sales (8 percent)
6. Industrial building sales (8 percent)

Commercial practitioners belong to many groups

Forty-three percent of Realtors Commercial Alliance members said they belonged to a commercial affiliate of NAR. Many survey respondents also hold membership in other real estate specialty organizations. Among respondents:

• 31 percent were members of the International Council of Shopping Centers
• 10 percent were members of the National Association of Industrial and Office Parks
• 9 percent were members of the Appraisal Institute
• 9 percent were members of the Building Owners and Managers Association

The commercial segment continues to be dominated by men and by practitioners working in independent companies. Seventy-four percent of respondents were male and 79 percent said their company was not affiliated with a large national or regional brand.

The Realtors Commercial Alliance is an NAR division dedicated to serving the needs of Realtors practicing in the commercial arena. There are currently 75,000 RCA members. The membership survey was presented at a commercial research meeting held as part of the Realtors Conference & Expo.

Commercial Real Estate Index to launch

Also at this week’s convention, NAR announced it would be teaming up with the Society of Industrial and Office Realtors, on the analysis of SIOR’s Commercial Real Estate Index. The index is a measure of SIOR members’ assessment of market conditions.

NAR will continue to release its own quarterly Commercial Leading Indicator, a measure that forecasts commercial market activity on the basis of job growth, manufacturing, purchasing power and other quantitative factors.

Source: REALTOR® Magazine Online

© 2007 FLORIDA ASSOCIATION OF REALTORS®

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